The month-end performance estimate as of February 28, 2015 for Horse Cove Partners Absolute Return Strategy is +3.08%, net of fees1. Since the inception of trading in December 2010, the strategy has achieved a total cumulative return of +182.12%.
Market Recap and Commentary
Obviously the “top” was not in, answering the question we started our newsletter with last month. The S&P 500 Total Return Index had one of its best months in years rising 5.75% in February. New closing records were established in the month, with the new all-time high being recorded in the S&P 500 on February 24, 2105 at 2115.48. Since the bottom on February 1, 2009, when the S&P 500 closed at 735.09, the index is up 187.79%.
Volatility declined steadily through the month. On January 30, 2015, the VIX closed at 20.97%. On February 27, 2015 the VIX closed at 13.34%. During the month VIX averaged 16.16%. While that is down for the long term average of about 20%, we are currently running up about 300 b.p. over last year’s average. Year to date the closing average VIX has been 17.55%
The bull market continues to rage on. While we have noted that there are signs the bulls are getting tired, the trend is still up.
Performance and trading update
We saw volatility decline steadily in February and that had some impact on the monthly returns. In particular, was the lack of appetite on the call side to sell premiums. There was no margin pressure during the month and we did not need to take any defensive actions.
The Horse Cove Partners Absolute Return Strategy has received its third consecutive Monthly Performance Award from BarclayHedge in the Option Volatility category and was ranked number 2 for the year ending in December.
We wrote puts and calls an average of 6.375% and 3.13% out of the money respectively. However, we did not sell any calls the last week of the month. The pricing was so low, that we did not feel it was worth the risk to only make a nickel of potential premium. Our guess is that the market participants do not expect the S&P 500 to climb significantly from here.
Here are the returns versus the S&P 500 total return index for the periods indicated:
IRA Update
Here are the returns for the consolidated IRA accounts for the periods indicated:
*Trading of IRA accounts began in September 2014. (1)
IRA accounts must use Reg. T Margin which means that fewer option contracts can be written than in the “regular” accounts that use Portfolio Margin. Over time, this will result in lower returns when compared to the “regular” accounts.
The Decision to Buy
One of the core tenants of the Horse Cove Absolute Return strategy is our belief that predicting the direction of the market is virtually impossible. We therefore spend little time making an attempt to do so. Our strategy can profit in rising, falling and sideways markets, as long as the markets act in a historically normal fashion.
That does not mean however that we are not aware of market conditions. It is said that a decision not to sell is a decision to buy. We thought this month we would call attention to some of the reasons why today might be a better time to sell than buy. We must give credit to John Hussman over at www.hussmanfunds.com for pointing out the following in his weekly market comment:
• The cyclical adjusted P/E of the S&P 500 index surpassed 27 versus a historic norm of just 15 prior to the late 1990’s market bubble.
• The S&P 500 price revenue ratio surpassed 1.8 versus a pre bubble norm of 0.8.
• Advisor bullishness is 59.9% compared to only 14.1% bears. One of the most lopsided sentiment extremes on record.
• The S&P 500 rally is historically long in the tooth and already exceeds the valuation peaks set at every cyclical extreme in history but 2000.
His conclusion, “our estimate of prospective 10-year returns on all conventional assets classes have simultaneously declined below 2% annually. We don’t expect a portfolio mix of stocks, bonds and cash to achieve any meaningful returns over the coming 8 year period.”
Starting in 1991, the S&P 500 had 9 consecutive positive years and then had two years of double digit declines. It took 4.5 years to recover. In 2008 the market finished 5 consecutive positive years then declined -37%. It took 5 years to get back to even after that.
The S&P 500 is entering its 7th year of positive gains. We encourage you to take a moment to consider that this time may not be different. We realize that equities are a major allocation of all of our readers of these updates. We only ask that you make an informed consideration of whether today is a good time to be buying or to consider other alternatives.
Horse Cove Update
We received an Award of Excellence from Barclay Hedge as the No. #2 performer in the Option Volatility category for the year ending December 2014 and #2 for the month of January. This makes three consecutive months in a row that we have been recognized by Barclay Hedge as a top performer.
Total assets under management now exceed $15.38 million in the Horse Cove Absolute Return strategy.
We value each of our clients and the assets each has entrusted to us in our strategy and will continue to pursue attractive returns to the benefit of all.
About Horse Cove Partners LLC
Profiting from the art and science of taking risk.®
Horse Cove Partners was founded by Sam DeKinder and Kevin Ellis in January of 2013 with the commitment to help grow clients’ assets with a highly disciplined investment strategy, replicated weekly, to extract absolute returns from the market by trading short volatility option spreads. The firm was launched after more than two years of trading experience with personal assets that began in December of 2010. The firm is built on the strength of hedge fund trading expertise developed beginning in 2002.
“We do not believe we are smarter than the market, nor can we time the market in any given week or month. As a result, we take an investment approach similar to an insurance company in that our investment strategy focuses on probability of success and the management of risk. We believe that it is possible to realize positive returns through disciplined focus on the risk of each trade with a weekly investment horizon, and accepting intelligent losses when risk events occur.”
We would like to thank you for your continued support and look forward to being in touch with you in the near future.
Sincerely,
Sam DeKinder, Kevin Ellis
John Monahan and Michael Crissey
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
jmonahan@horsecovepartners.com
mcrissey@horsecovepartners.com
Horse Cove Partners LLC
1899 Powers Ferry RD SE
Suite 120
Atlanta, GA 30339
678-905-5723 main
1Net estimate on a consolidated basis of similar accounts as of 2.28.2015, which is preliminary and subject to revision. Performance estimate described herein as “YTD” are net of fees and expenses including a 2% per year management fee and 20% incentive fee and also assumes investors have been invested with no withdrawals.
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Finally, to the extent that performance information is contained in this message, you are hereby advised, and you acknowledge it, that past performance does not assure future results, which are not guaranteed by Horse Cove Partners LLC or any of its affiliated entities or by any insurance mechanism.
IRS CIRCULAR 230 NOTICE. Any advice expressed above as to tax matters was neither written nor intended by the sender or any Horse Cove Partners LLC affiliated entities to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed under U.S. tax law.
